SkyWest Airlines 2012 Annual Report Download - page 80

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
unscheduled repairs for certain of its Bombardier CRJ700 Regional Jets (‘‘CRJ700s’’) and
Embraer S.A. (‘‘Embraer’’) ERJ145 regional jet (‘‘ERJ 145’’) aircraft. Under the terms of the
agreement, the Company pays a set dollar amount per engine hour flown on a monthly basis and the
third party vendor will assume the responsibility to repair the engines at no additional cost to the
Company, subject to certain specified exclusions. Maintenance costs under these contracts are
recognized when the engine hour is flown pursuant to the terms of the contract. The Company uses the
‘‘deferral method’’ of accounting for its Embraer Brasilia EMB-120 turboprop aircraft (‘‘Brasilia
turboprop’’) engine overhauls wherein the overhaul costs are capitalized and depreciated to the next
estimated overhaul event. The costs of maintenance for airframe and avionics components, landing gear
and normal recurring maintenance are expensed as incurred. For leased aircraft, the Company is
subject to lease return provisions that require a minimum portion of the ‘‘life’’ of an overhaul be
remaining on the engine at the lease return date. For Brasilia turboprop engine overhauls related to
leased aircraft to be returned, the Company adjusts the estimated useful lives of the final engine
overhauls based on the shorter of the remaining useful life or the respective lease return dates.
Passenger and Ground Handling Revenues
The Company recognizes passenger and ground handling revenues when the service is provided.
Under the Company’s contract and pro-rate flying agreements with Delta, United, US Airways,
American and Alaska, revenue is considered earned when the flight is completed. Revenue is
recognized under the Company’s pro-rate flying agreements based upon the portion of the pro-rate
passenger fare the Company anticipates that it will receive. Other ancillary revenues commonly
associated with airlines such as baggage fee revenue, ticket change fee revenue and the marketing
component of the sale of mileage credits are retained by the Company’s major airline partners on
flights that the Company operates under its code-share agreements.
Delta Connection Agreements
SkyWest Airlines and ExpressJet are each parties to a Delta Connection Agreement with Delta,
pursuant to which SkyWest Airlines and ExpressJet provide contract flight services for Delta. The Delta
Connection Agreements provide for fifteen-year terms, subject to early termination by Delta, SkyWest
Airlines or ExpressJet, as applicable, upon the occurrence of certain events. Delta’s termination rights
include (i) cross- termination rights between the two Delta Connection Agreements, (ii) the right to
terminate each of the Delta Connection Agreements upon the occurrence of certain force majeure
events, including certain labor-related events, that prevent SkyWest Airlines or ExpressJet from
performance for certain periods, and (iii) the right to terminate each of the Delta Connection
Agreements if SkyWest Airlines or ExpressJet fails to maintain competitive base rate costs, subject to
certain adjustment rights. The SkyWest Airlines and ExpressJet Delta Connection Agreements contain
multi-year rate reset provisions beginning in 2010 and continuing each 5th year thereafter. In addition
to the termination rights, Delta has the right to extend the term of the Delta Connection Agreements
upon the occurrence of certain events or at the expiration of the initial term. SkyWest Airlines and
ExpressJet have the right to terminate their respective Delta Connection Agreement upon the
occurrence of certain breaches by Delta, including the failure to cure payment defaults. SkyWest
Airlines and ExpressJet also have cross-termination rights between the two Delta Connection
Agreements.
76